Enlightenment Through Understanding

Right Again: Tech Companies Keep Posting Blowout Earnings

But I am pessimistic about the hardware unicorns (Fitbit, Skullcandy, GoPro, Jawbone) as opposed to the app/website ones, so It’s not like I am emphatically bullish about everything, and these hardware companies would fare much worse during a correction. The fact that hardware unicorns trade at a much smaller multiple than website/app ones is evidence of this vulnerability to macro economic factors, and the general tendency of hardware to be susceptible to fads and change in user tastes.

Since then, shares of hardware companies (Fitbit, Gopro) have done poorly, and social networking/ad-based internet companies have thrived.

As of July 2016, the S&P 500 closed at another record high, and Google, Facebook, and Amazon reported yet another quarter of blowout earnings:

Facebook stock is above $130 (it was at $20 in 2012 back when pundits thought it was doomed due to the bad IPO and unfounded fears over Facebook being unable to adapt to mobile usage), Google above $780. (Times TWO for the A and B shares – combined it’s almost $1,600. Mind-blowing considering it was at $100 combined in 2004…let that sink in.) Amazon now at $770.00 share….was at $7.70 in the early 2000′s. That is not a misplaced decimal. Everything just keeps going up and keeps being better then expected, as much as the media keeps repeating the same lines about the ‘economy being weak’, the ‘stock market being overextended’, or ‘tech valuations being a bubble’.

Does that make me a superforecaster? Maybe, but a lot better than z3r0hedge and Karl Denninger of MarketTicker.org, who have been collectively banging their heads against the wall about the same ol’ doom and gloom stuff since 2009 to no avail. You got to know when to throw in the towel and admit being wrong, or that you have no talent at predicting things (of course, z3r0hedge has built a very lucrative business out of scaring people to buy overpriced gold and other bad investments). Most people would be better prognosticators if they tuned out their personal biases in the prediction making process, or if they had a better understanding of macroeconomics (QE is not money printing, for example), investing (index funds beat individual stock picking, with few exceptions), and the stock market (stocks rise because of profits & earnings growth…everything else is noise).

He said in a series of interviews that he does not need to read extensively because he reaches the right decisions “with very little knowledge other than the knowledge I [already] had, plus the words ‘common sense,’ because I have a lot of common sense and I have a lot of business ability.”

Trump said he is skeptical of experts because “they can’t see the forest for the trees.” He believes that when he makes decisions, people see that he instinctively knows the right thing to do: “A lot of people said, ‘Man, he was more accurate than guys who have studied it all the time.’ ”

I kinda feel the same away when it comes to making economics predictions. I don’t need to read dozens of technical books to understand the gist of the situation, relying more on intuition, yet pretty much all my predictions have been right. It’s more about applying existing knowledge and filtering out the noise, than just absorbing as much as possible. Many experts, both on the left and right, were wrong since 2009. Krugman, in 2012, predicted that the sequester and budget cuts would cause a major decline in employment and possible recession, and he also predicted the unraveling of the Euro – wrong on both counts. At the same time, on the ‘right’, there were many failed predictions of hyperinflation, crisis, bear market, recession, and dollar collapse. Interestingly, James Altucher, despite not being an economist, like myself, also predicted everything correctly. I think that agrees with how experts and ideologues sometimes get it all wrong, whereas outsiders with a clear mind can make the correct connections instead of being clouded by too much information or personal biases.

But everything keeps going up, and will continue to do so: Bay Area real estate; S&P 500 and Nasdaq 100; tech stocks like Google, Facebook, and Amazon; leading web 2.0 companies like Slack, Snapchat, Uber, Pinterest, Air BNB, and Dropbox.

Amazon, Facebook , Google – three stocks to rule the world. They cannot do any wrong, and I don’t mean that sarcastically. Buying these stocks is like investing in the companies that are building the matrix, but it’s real life.

It’s just nuts..even Microsoft and Cisco in the 90′s..the growth was finite, but there is no limit to Facebook, Google and Amazon. Every quarter is a crusher…over and over, year after year.

Just when you think their growth is ‘stalled out’, something new comes along. Now it’s mobile. Or it’s ‘messaging’. In a few years, maybe it will be virtual reality.

The small mobile screen is perfect for advertising. Adsense ads are everywhere – Bloomberg, Forbes, Fortune, etc. Sometimes major brands try Adsense alternatives but always go back because Adsense pays the most and has the most advertisers. Whenever someone clicks those ads, Google makes money and so does the publisher. Facebook also plans to unveil a similar 3rd party ad platform.

The most common retort is that something ‘new and better’ will replace Facebook, Google, and Amazon. Fat chance (or at least not for a verrry long time):

People said the same thing about Google in 2004 ‘Anyone can make a search engine; Microsoft has so much money they can crush Google’ (Despite dozens of iterations and expensive marketing campaigns, Bing never grew.)

Same thing about Facebook in 2010 ‘Anyone can build a social network’ (Many have tired and failed.)

Same thing about Apple in 2003-08 ‘Sony/Microsoft/ etc can make a music player/phone’ (Zune anyone?)

In the 80′s, how would have guessed that Microsoft, decades later, would still be the dominant player in operating systems? Apple and Linux never got above a couple percent. Only thirty years later has Microsoft become ‘slightly less relevant’, but the company continues to generate enormous profits, and has diversified its business substantially beyond Windows.

The ‘Big Three’ (Ford, GM, and Chrysler) enjoyed a reign that lasted over fifty years until foreign brands gained a foothold.

Too many people are trying to extrapolate the future from the past, using the tech crash of 2000 (a single data point) for predicting the future, when the empirical evidence suggests that successful, profitable companies with market dominance can have decades-long uninterrupted expansion in growth and share prices. Walmart…anther example. Only recently, after nearly half a century of uninterrupted growth, have things finally begun to slow down. But part of the reason why companies like Google, Facebook, and Amazon are so successful, even more so than Cisco and Microsoft in the 90′s, is because of their huge network effects and market dominance. Snapchat is another one. Air BNB. These are not flashes in the pan, but have enormous, entrenched userbases that are not only loyal and will stick around, but the advertising potential is also significant. Just look at Facebook, and the power of advertising and market dominance (quoting from a comment):

Facebook will be doing $16 to $20 billion in profit within five or so years. They’ll have accumulated $60 to $80 billion in cash. They’ll have a half trillion dollar market cap in the next few years. They’ll liberally use the cash and market cap to buy into any market they’re missing out on, just as Microsoft purchased LinkedIn and Skype to try to stay in the game.

These types of companies do not dislodge so easily such that they get “eaten for lunch” in the mere span of ten years. It’s the exception for one of them to implode. This is especially true given that Facebook is still ramping, their sales growth is still extraordinary and their daily actives are still growing just fine for their size. They likely won’t even peak on users for a few years, at a minimum; and afterward, they still have years to grow their non-US ad business a lot, because that part of their business is wildly non-optimized.

In ten years, Facebook will just be reaching the equivalent business plateau that Microsoft hit circa 2000-2003. They’re still a very young business in the first half of their growth phase, they haven’t even reached mild stagnation yet. A business doing $2 billion in quarterly profit, growing sales at 50%, and they’re going to get eaten for lunch within a decade? It’s extremely unlikely, as the mountain of cash they’re accumulating will buy their continued place in the ecosystem, whether the anti-FB crowd likes it or not.

Compare that to the 90′s when you had much higher PE ratios and much weaker earnings. In 2000, the Nasdaq 100 had a PE ratio above 100; it’s only 20 now. The S& 500 had a PE ratio of 35; now it’s only around 17. There are real fundamentals at work here behind these high share prices, not just euphoria.